Understanding Agency
In modern commerce and business, no individual can practically perform all transactions personally. To manage operations, individuals often appoint agents to act on their behalf. This legal relationship is known as agency.
According to Section 182 of the Indian Contract Act, 1872, “An agent is a person employed to do any act for another or to represent another in dealings with third persons.” The person for whom the act is done is called the principal. Thus, in essence, agency law governs relationships where one person (agent) acts on behalf of another (principal), binding the principal to the acts of the agent within the scope of authority.
Agency is an important tool in commercial law because it allows for the efficient conduct of business, spreading responsibilities while legally protecting both parties. Understanding the termination of agency is equally important, as it defines when the relationship ends and the liabilities and rights of both parties cease or continue.
Creation of Agency
Before discussing termination, it is important to understand that an agency is created through the following methods:
- Express Appointment (Section 185): An agency may be created by express agreement between the principal and agent, either orally or in writing.
- Implied Agency: Agency may be implied from circumstances, conduct, or prior dealings of the parties.
- Agency by Ratification (Section 196): When a person acts on behalf of another without authority and the principal later confirms those acts, an agency by ratification arises.
- Agency by Necessity or Law: In emergencies or under specific laws, a person may act as an agent to protect another’s interests.
Once an agency is in place, the agent acquires authority to act, while the principal is bound to honor lawful acts performed within this scope.
Termination of Agency
The law relating to termination of agency is primarily governed by Sections 201 to 213 of the Indian Contract Act, 1872. Termination can occur either by the act of the parties or by operation of law.
1. Termination by the Act of Parties
(a) Mutual Agreement (Section 201)
The agency can be terminated if both principal and agent agree to end the relationship. Mutual consent ensures an amicable dissolution.
Example:
A principal and his sales agent mutually agree to terminate the contract after a successful project.
(b) Revocation by Principal (Section 202)
The principal has the right to revoke the agent’s authority at any time. However, if the agency is coupled with interest, the principal cannot revoke it unilaterally.
Example:
A principal hires B to sell a property and promises commission. If the agency is coupled with B’s commission rights, revocation is not allowed without compensation.
(c) Renunciation by Agent (Section 203)
The agent may renounce or withdraw from the agency, provided reasonable notice is given to the principal. Failure to provide notice may make the agent liable for losses incurred due to sudden withdrawal.
2. Termination by Operation of Law
An agency may also terminate automatically under the following legal circumstances:
(a) Death of Principal or Agent (Section 204)
The agency terminates immediately upon the death of either the principal or the agent. In case of death, the personal representative cannot continue the agency unless specifically authorized.
Example:
If a principal dies unexpectedly, the agent’s authority to sell goods on behalf of the principal ends automatically.
(b) Insanity or Legal Incapacity (Section 205)
If the principal or agent becomes unsound of mind, the agency terminates as the person can no longer exercise or authorize acts effectively.
(c) Insolvency (Section 206)
If the principal is declared insolvent, the agent cannot act on behalf of the principal as the financial authority ceases. Similarly, if the agent becomes insolvent, the principal may terminate the agency to avoid liability.
(d) Destruction of Subject Matter (Section 207)
If the subject matter of the agency is destroyed or ceases to exist, the agency naturally terminates.
Example:
If an agent is authorized to sell a particular cargo and it is destroyed by fire, the agency ends automatically.
(e) Change in Law (Section 208)
If a change in law renders the agency unlawful or impossible to perform, the agency terminates.
(f) Expiration of Time (Section 209)
Where the agency is limited to a certain period, it terminates automatically upon expiration of the agreed duration.
(g) Completion of Purpose (Section 210)
Once the specific task or objective of the agency is completed, the agency naturally ends.
Example:
A principal appoints an agent to sell a property. Once the property is sold, the agency ends.
3. Effects of Termination
Upon termination of agency:
- The agent’s authority ceases immediately.
- The agent must return all documents, goods, and property of the principal.
- The principal remains liable for acts done by the agent before termination, provided the acts were within authority.
- Confidentiality obligations may continue even after termination.
Example:
A real estate agent must return keys, contracts, and confidential client information even after the agency ends.
Real-Life Example of Termination of Agency
Suppose A appoints B as a sales agent to sell goods in a city for a three-month period. B discovers that the principal is engaging in unfair trade practices. B provides reasonable notice and renounces the agency (Section 203). Simultaneously, the principal decides to close the business. The agency terminates both by renunciation and by completion of purpose/termination by principal.
This example demonstrates how both mutual consent and operation of law can result in termination.
Mnemonic to Remember Termination of Agency — “DRIP CDE”
Use the mnemonic “DRIP CDE” to recall the modes of termination of agency:
- D – Death of principal or agent (Section 204)
- R – Revocation by principal (Section 202)
- I – Insolvency of principal or agent (Section 206)
- P – Purpose completed / Expiration of time (Sections 210, 209)
- C – Change in law making agency illegal (Section 208)
- D – Destruction of subject matter (Section 207)
- E – Expiration of agency period (Section 209)
Mnemonic Sentence:
“Diligent Rules Instruct Partners to Cease Duties Efficiently.”
This helps students remember the seven major grounds of termination quickly for exams or practical reference.
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